What goes behind Bitcoin

 There is a lot of hype about Bitcoin and other alt coins. Investors majority of whom are youngsters, see this as a "get rich quick scheme" and we can't even blame them when you see people making profits 10 times their investment in a very short period, you tend to rethink your investment strategy because no one wants to feel left out. But very few of them understand what goes behind bitcoin, how is it running without any central authority, who verifies my transaction, is it safe?. The answer to all these questions is Blockchain 

What Is Blockchain?

Blockchain is a special type of Distributed ledger or you can understand it as a Decentralized database. In blockchain as the name suggests, data is stored in the form of blocks, in the case of bitcoin, it stores information about the transactions. Each block contains some data and every block has its unique number, you may think of it as a fingerprint of that block. This unique number is called a Hash and it is developed based on the data present in the block, if you change the data the hash changes. Bitcoin uses the SHA256 algorithm for generating Hash. You can check out how Hash functions are used in blockchain by following this link. Blockchain is named so because each block is connected to its previous block thus forming a chain of data. 

The first block is called the "Genesis Block" and in the case of bitcoin the first block was mined in 2009 by an anonymous developer Satoshi Nakamoto and because blockchain is a distributed ledger, we can see the transactions happening throughout the world creatively using this link and we can also see the Genesis block using this link.

Now as all of these blocks are connected with each other, if someone tries to tamper with any block in the chain, the hash of the block will change (as there is a different hash for different data) and the block next to it that had the original hash will tell us that the data in the previous block has tampered

Let us understand this by an example. Suppose I have a chain of blocks as shown below.

Now, when I try to add some data in block number 2, it will result to a different hash and all the blocks ahead of it will be rejected.

This shows that not only blockchain is safe but it is also tamper-proof. But you may think that all the data ahead of the tampered block is lost. That is where the "distributed" part of ledger comes into place. All of the participants in the blockchain have a copy of all the transactions that are taking place. Each of the participants are referred to as a Node, and each node is connected to every other node, so even if someone tries to tamper with the blockchain everyone else on the chain will have their own copy and they will know that the data was tampered with and they will reject that chain, so no data is lost.

Who validates these Transactions? 

Nodes that are called Miners validate these transactions, buy using Proof of work algorithm which is a decentralized consensus mechanism that allows transaction in cryptocurrencies to be functional without a central authority. All these miners compete against each other to add a new block to the blockchain and they are rewarded if they add a new block. To make this process fair and to make sure that there is competition, bitcoin produces a puzzle that is to be solved in order to add a new block, every single miner starts trying to find the solution to that one Nonce that will satisfy the hash for the block and whosoever solves this puzzle first gets to add the new block and hence get the reward that is the new-minted bitcoin.  Everyone else on the chain verifies this new block and comes to a consensus if the majority of the nodes agree that this is a valid block the new block is added to the chain, and the miner gets rewarded.
This monetary reward also drives them to follow the rules and due to proof of work Bitcoin and other cryptocurrency transactions can be processed peer-to-peer in a secure manner without the need for a trusted third party.

Why does Bitcoin have value?

Bitcoin has value for the same reason why fiat currencies are valuable. A successful currencies have six key attributes—scarcity, divisibility, utility, transportability, durability, and counterfeitability, and bitcoin arguably holds up very well when it comes to these six characteristics. 

• It is finite in number, only 21 million bitcoins can exist and 18.638 million bitcoins have been mined, which leaves 2.362 million yet to be introduced into circulation.

• Bitcoin is divisible up to 8 decimal points.910 The smallest unit, equal to 0.00000001 Bitcoin, is called a "Satoshi" after the pseudonymous developer behind the cryptocurrency

• Bitcoin offers an efficient means of transferring money over the internet and is controlled by a decentralized network with a transparent set of rules, thus presenting an alternative to central bank-controlled fiat money.

• It is nearly impossible to counterfeit bitcoin as it has a very large network and it is very hard to hack 51% of the nodes to come to a consensus which is based on fraud transaction.

However, Bitcoin's status as a store of value is still questionable. Bitcoin's utility as a store of value is dependent on its utility as a medium of exchange. We base this in turn on the assumption that for something to be used as a store of value it needs to have some intrinsic value, and if Bitcoin does not achieve success as a medium of exchange, it will have no practical utility and thus no intrinsic value and won't be appealing as a store of value. Like fiat currencies, Bitcoin is not backed by any physical commodity or precious metal. So for it to continue having value, bitcoin must be widely accepted and used by as many people as possible. Right now it is just seen as a get rich quick tool and there are very few who are investing in bitcoin for a long term, but for bitcoin to be sustainable, more and more exchanges have to accept bitcoin as a form of currency and more people have to start believing and holding bitcoin. 

We hope this article added some value and now you have a better understanding of how bitcoin works and why blockchain is important. It is important to diversify your investments but it is more important to understand what are the basis of the asses that you are investing in.

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